To repair or not to repair? That is the question. Maintaining the farmyard, farm buildings and machinery is an ongoing job for every farmer. As the sums involved each year can be significant it is important farmers obtain a tax deduction against their farming profits for these expenses. Unfortunately depending on the expense incurred tax relief is not always available.

Such business expenditure falls into two categories, revenue or capital costs. Revenue treatment will be available on expenditure incurred on repairs and providing there is no private use element will result in 100% deduction against taxable profits in the relevant year. Tax relief for capital costs, for instance on improving or changing an asset or acquiring a new one will see the available tax relief range from a full deduction for the expense, to a phased deduction, to no deduction at all. The abolition of Agricultural Buildings Allowances (ABA’s) for expenditure on new sheds and internal structures makes obtaining tax relief for this type of expenditure difficult and a detailed review must be undertaken by the farmer/their advisor to assess the elements which still qualify for tax relief.

Plant and machinery capital allowances in the form of the Annual Investment Allowance (AIA) can mean tax relief at 100% is given on qualifying expenditure of up to £250,000 incurred in each year (between 1 January 2013 and 1 January 2015), with the relief being pro-rated if the accounting year end is not in line with the tax year. For expenditure not within the AIA threshold and provided it does not qualify for enhanced Capital Allowances, tax relief is spread over a number of years at 18% or 8% depending on the nature of the expense. Other types of capital expenditure will simply not obtain any tax relief at the time it is incurred and it may be on the eventual sale of the business that a deduction is given for the enhancement expenditure, which when dealing with a generational business like the Family Farm is unlikely to materialise at least in the short to medium term.

Farmers can often face a challenge from HM Revenue & Customs (HMRC) on costs charged as repairs with the result being either a full or partial disallowance of the cost. A revision to the business’ tax deductible expenses in this way could result in additional tax being payable. HMRC have recently produced draft guidance which is intended to provide further information as to what constitutes a repair. HMRC’s intention is to introduce formal guidance in this area later in the year. Given the increased spotlight on this area by HMRC, it is important businesses assess properly the costs incurred and speak to their accountant if considering carrying out maintenance/capital projects on the farm. There could well be increased interest in this area by HMRC going forward.

In general, the accounting treatment of the cost should mirror the tax treatment i.e. if the repair is shown as an expense in the Profit and Loss Account (P&L), it should be treated as such for tax purposes. Conversely, if the treatment of the expenditure is more akin to capital expenditure, the cost would be shown within the balance sheet and capital allowances treatment considered thereafter. For example a repair to the brakes of a tractor would be a revenue expense and therefore deductible for tax purposes. On the other hand, the purchase of a tractor is a capital expense, detailed within the balance sheet and tax relief being given in the form of capital allowances.

The draft guidance introduced by HMRC on what constitutes a repair, highlights to the taxpayer specific issues that need to be considered when looking at whether or not the cost of ‘repairs’ is allowable expenditure summarised as follows:

Timing of expense

Relief is given in that year when the cost of the repair is deducted in the Profit and Loss Account in line with accountancy principles.

Replacing an asset

Replacing a part of an asset, is a repair to the larger asset. Replacing the whole asset is not a repair and is not allowable for tax purposes because it is capital expenditure.

A topical tax case recently involved the re-surfacing of a farm road, which had been treated as an allowable expense by the taxpayer. This was challenged by HMRC on the basis that it should have been a capital treatment.

In re-surfacing the road, the tarmac had been removed and the subsurface repaired. The road was then re-surfaced and new kerbing added to bring it up to modern standards. As a result the Courts ruled that the road was brought back to its standard and there was no improvement involved.
The taxpayer won the case.

Integral Features

Replacing certain integral features of a building (e.g. certain electrical and water systems) is treated as capital expenditure.

Improvements

The cost of improvements to an asset are generally not allowable revenue expenses.

Alterations

The cost of altering an asset so that it does something different is not allowed as a revenue deduction.

New Materials

Repairs are often carried out using new materials. The use of new materials does not mean that the repair is not allowable.

New Technology

Has the asset as a whole been improved following the expenditure? If it does the same job as before then it may well simply be a repair.

Change of Ownership

Although an asset has recently been acquired, the cost of repairs will usually remain allowable expenditure i.e. routine repairs and maintenance. If the asset is acquired in a run-down condition then the cost of putting the asset into a usable condition is capital expenditure.

Getting the treatment correct can have significant tax savings and the following actions can be taken to help get the correct treatment and maximise tax relief:

• Take time dated pictures of the work before and after. In the example of the farm road case above, this could help provide evidence as to why you treated the expenses as revenue for instance.
• Ensure invoices for any works done contain sufficient detail and breakdown of work carried out in order to identify the elements of repairs.
• Consider specific concessions within the tax legislation do these increase the tax reliefs otherwise available – for example silage pits and slurry tanks qualify for plant and machinery capital allowances.

In every event, you should speak to your accountant prior to undertaking any significant expenditure on the farm to ensure you maximise the tax reliefs available. Get in touch with our Agriculture team for assistance.